Trade talks involving the U.S.and China will dominate the market’s focus in the week beforehand, while investors are also watching to see whether other companies join the ranks of Apple and warn about an earnings miss.
Apple blamed a significant revenue miss because of a sudden drop off in iPhone earnings in China last November 2018. The strike was seen as an indication that not only the trade tensions hitting China’s economy, but also the U.S. economy and corporations. Apple’s remarks came the day before a spectacular drop in ISM manufacturing data which was also blamed on trade friction. The S&P 500 surged over 3.3 percent to 2,531 and was up 1.7 percent for the week. The S&P was up more than 7.5 percent from its Dec. 24 low near. Krosby said the market needs to build on its gains. “This has been a market that had all of the signatures of the bear claws death by 1,000 cuts. No data release was viewed as positive. Everything was seen as negative. If we could turn that psychology around and build on it, but we’re waiting to see whether there are sellers that have been waiting to escape. We will need to find out if they are still there.” “This market had was a strong data launch, an unequivocally powerful data release,” said Krosby.
From this standpoint, it decreases the risk that the Fed will increase too far like it did in 2004 and 2006. “The question is, are we planning to have warnings? Given the financial data that we have seen, particularly the downturn from the new orders component, we probably are likely to have warnings, and the issue is, can it be baked into stock prices? We believe, for the most part, it is,” said Emanuel. Economists expect U.S. growth to slow slightly, to the 2-2.5 percent range in the first half but markets have been responding to the prospect of an even slower market.
The ISM data for December was particularly discouraging due to a steep drop in new orders. He is expected to deliver the exact dovish message about flexibility in regards to policy and patience in regards to raising interest rates. “China is going to be absolutely the big thing,” said Julian Emanuel, chief equities and derivatives strategist in BTIG.
China cut reserve requirements on Friday to encourage more bank financing, its latest policy transfer aimed at ending a recession.
Powell also signaled the Fed could be”patient” and it will be flexible and prepared to change policy when it sees changes in conditions. Powell had stated the Fed’s balance sheet reduction program was ‘on autopilot’ when he spoke in December, which spooked some investors that wanted to see that the Fed willing to modify its policy from the face of the market’s sell-off. Emanuel said the rally on the Fed was vital since it was a concern because of its market. He expects the Fed to stay on hold this season and announce that it will stop the roll from its balance sheet from mid-year.
China, more likely to concede in trade discussions, says Brookings’ David Dollar 5:56 PM ET Fri, 4 Jan 2019 Markets will also remain heavily centered on data following the feeble ISM survey followed by a surprisingly strong December job report with 312,000 nonfarm payrolls added. The employment report showed a healthy labor market, together with wage growth of 0.4 percent and a pickup in participation by over 400,000 workers. “That makes people feel better, and from our point of view, it makes it more likely that this is going for a shorter, shallower non-recessionary bear market,” said Emanuel. The S&P 500 has temporarily visited a bear market, decreasing 20 percent from its all-time high on an intraday basis.
Throughout his appearance Friday, Powell indicated that inflation wasn’t an issue for the Fed and the market remains in good shape despite concerns. He also said the Fed has been paying attention to the current market, which is reflecting a weaker outlook than the data suggests. “What the market requires next week and the week after is favorable guidance from businesses. What are firms telling us? What are their clients telling us” Said Quincy Krosby, the chief market strategist at Prudential Financial. “If we could move out of stellar earnings to a more moderate earnings background, the marketplace will accept this but if advice is weak and organizations are decreasing revenue development, that will influence the market.” “This reinforces the view that the bulk of the bear market decline is behind us, and there’s at least an expectation that communication between the U.S. and China is poised to improve rather than become acrimonious throughout the next few weeks,” he said.